ANSWER ALL THE FOLLOWING: There are several industries with low percentages of d

Question

ANSWER ALL THE FOLLOWING:

There are several industries with low percentages of debt financing. Take a look and identify some with a low percentage of debt financing and do the same with firms that have a high percentage of debt financing.

Note: Do not use the banking financial services industries.

Based on the types of firms that use a small amount of debt and those that use higher amounts of debt, what can you conclude? What is it about the firms that use low amounts of debt? More debt would lower their cost of capital so what is holding these firms back form taking on more debt?   You need to think a little, do not simply say the firms with low debt are all in industry x or industries similar to x. That is obvious, what is the economic intuition? What is the story?

Explanation / Answer

Answer:

Examples of some of the industries with low debt financing are as follow:

1. Energy 2. Technology 3.Healthcare 4. Retail

Examples of some of the industries with high debt financing are as follow:

1. Basic materials 2.Capital goods

The industry with more long term capital requirement or the capital intensive industries tend to have more debt in thier capital structure because of the huge tangible fixed asset and a quite established or certain cash flows. The industries like technology attract more equity and they find difficult to raise debt because most of their assets are intangible and also the cashflow it generates is quite unpredictable.

The more debt in capital structure, the more it risks of being unable to meet its financial obligations to loan providers. The high leverage makes the firm more susceptible to a decrease in profitability as a result of high fixed interest cost, making it highly risky for bankruptcy.

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